The omitted asset and the quiet fix
You are the tax manager at a mid-tier practice in Lagos. Your client, Kestrel Logistics Ltd, a haulage company with turnover of NGN 1.4bn, filed its 2023 companies income tax return six months ago showing taxable profit of NGN 48m and tax payable of NGN 14.4m at 30%. While preparing the 2024 return, a junior associate finds that a NGN 22m forklift purchased in 2022 was omitted from the 2022 capital allowance schedule. Correcting it would reduce the 2023 brought-forward allowance and the 2023 tax charge by approximately NGN 6.6m. The CFO says: 'Do not reopen 2023. Just put the adjustment in the 2024 return and keep FIRS out of it.' The engagement letter covers 'preparation and filing of tax returns' and expressly excludes audit or assurance work. The board has not been told. FIRS has not queried the 2023 return.
1. Identify the professional, legal and ethical issues raised by the CFO's instruction.
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The instruction creates a conflict between client loyalty and the duty not to be associated with misleading information.
- Self-assessment: the 2023 return was filed on the basis that the capital allowance schedule was complete. If the omission makes the return materially misleading, leaving it uncorrected is not merely an administrative matter.
- Materiality: NGN 6.6m is about 46% of the original tax charge and 13.75% of taxable profit. That is likely material by any reasonable measure.
- Professional standards: integrity and objectivity require correction or disclosure. Confidentiality does not permit concealment from a tax authority.
- Scope: the engagement excludes audit, but the error was discovered in work within the engagement. The firm cannot ignore it simply because assurance was not contracted.
- Governance: the CFO's instruction should be escalated to the board or audit committee, because the issue affects financial reporting and tax risk.
- Documentation: record the finding, the advice given and the client's response.
2. Draft the key points you would put in a written note to the CFO setting out options and consequences.
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The note should be factual and non-accusatory, but clear.
- Option A - amend or voluntarily disclose for 2023: correct the capital allowance schedule, disclose the error to FIRS and pay any resulting interest or penalty. This is the cleanest route and preserves the company's compliance record.
- Option B - correct in the 2024 return with disclosure: this may be acceptable only if the 2023 return is not materially misleading and the treatment is transparent. It should not be described as a 'quiet fix'.
- Option C - do nothing: explain that this leaves a misleading return on file, exposes the company to penalties, interest and reputational damage, and may expose the adviser to professional disciplinary action.
State that the firm cannot sign or file a return that conceals a known material error. Recommend that the board or audit committee decide, and ask for written instructions. Set a deadline for the decision so that the 2024 filing is not compromised.
3. What should you do if the CFO insists on the 2024-only adjustment without disclosure?
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If the CFO insists after written advice, escalate the matter to the board or audit committee. If the client still refuses to correct a material misstatement, the firm should decline to file the 2024 return on that basis and consider withdrawing from the engagement.
The reasoning is that filing a return known to conceal a material error would associate the firm with misleading information. Withdrawal should be documented, and the client should be told in writing why the firm cannot continue. Confidentiality continues after withdrawal, so the firm should not volunteer information to FIRS beyond what law or professional rules require. The firm should also consider whether any reporting obligation arises, and take advice if unsure. The key is to avoid signing anything that the firm knows to be misleading.